Gaming Policy Models VI: Regulatory Enforcement

December 2010

Authors’ Note: Previous articles in this six-part series have covered a variety of topics that a jurisdiction contemplating the expansion or legalization of gaming should consider, including gaming models, taxation schemes and accounting controls. The last topic we are going to address is regulatory enforcement.

A critical component to effective regulation is that gaming regulators enforce the gaming laws. If a jurisdiction fails to enforce its gaming laws, those laws become, for all intents and purposes, meaningless. Operators in that jurisdiction soon realize that they can violate the laws without repercussion, and those who are ethically challenged will soon do so. Meanwhile, operators with high ethical standards will be at a competitive disadvantage and ultimately will be dissuaded from doing business within that gaming jurisdiction. A corrupt gaming jurisdiction will also likely deter players, as the fear of being cheated will cause them to take their business elsewhere.

For the most part, gaming regulators can effectively control a gaming industry by either detecting or preventing regulatory violations.1 Detection focuses on a licensee’s past behavior—specifically, the uncovering of regulatory violations that subsequently leads to a fine or revocation of the license of the violator. Prevention, on the other hand, strives to reduce the likelihood of non-compliance. Education and training are key aspects of prevention. Another principle method of prevention is deterrence. In order to deter licensees from committing regulatory violations, they must believe they will be caught and disciplined by the regulators. Such a perception is only created if regulators establish a strong regulatory presence. This can be established by a multitude of enforcement measures, including continual physical presence, undercover operations and routine inspections, all of which are detailed in the following.

Gaming regulations are typically enforced either by traditional police departments, which enforce the gaming regulations in addition to their other day-to-day responsibilities, or by a specialized body of enforcement personnel that focuses its efforts on gaming. Whether a jurisdiction opts for the former or latter will typically depend upon that jurisdiction’s size, budget and needs. For instance, the larger, more sophisticated gaming jurisdictions will typically implement a specialized gaming enforcement division. Here, the enforcement personnel will possess an expertise in gaming, which allows them to better detect regulatory violations and focus their efforts on the enforcement of gaming regulations. The major disadvantage of using such specialized personnel, however, is cost. Therefore, jurisdictions need to be able to rationalize the higher costs associated with specialized enforcement.

Whether or not a specialized enforcement agency is implemented, enforcement personnel typically have five main functions. The first is that of detecting and responding to regulatory violations, as described previously. The other four functions include: (1) maintaining a visible regulatory presence; (2) information gathering and intelligence; (3) order maintenance; and (4) service-related duties and prevention programs.2

An effective, but costly, method of maintaining a strong regulatory presence is maintaining visible scrutiny over the gaming establishment.3 A physical presence can be achieved by having regulatory agents stationed in the establishment. This is similar to the advantage gained by having police officers on the street.4 Simply, if the gaming operator and players know that enforcement personnel are present in the establishment, both parties will likely be deterred from violating the law. However, maintaining a physical presence is labor intensive and expensive. Therefore, such an enforcement tactic is better suited to a monopoly market as opposed to a competitive market, in which numerous gaming establishments exist.

The alternative to having a strong physical presence is to have a regulatory system that relies on covert detection. This approach relies on such methods as random undercover operations, which result in disciplinary proceedings when violations are discovered. Such undercover activities can be as simple as posing as a patron and observing the operations of the gaming establishment and the conduct of the employees and customers. The key to this approach is that licensees must fear detection and discipline to such an extent that they refrain from regulatory violations and implement procedures to assure compliance.5

Much of the information garnered by regulatory agencies needed to regulate the industry is obtained from conducting investigations. Nevertheless, other major sources of information also exist, including casino reporting and intelligence gathering. Intelligence information, for example, may come from other regulatory agencies or even informants. Regulatory agencies, therefore, should have procedures in place to assure that they only collect relevant and reliable information, that information is effectively analyzed and cataloged, that their records are periodically purged of incorrect and stale information, and that the identity of their informants is protected.6

Yet another function of the gaming regulators is known as order maintenance. A common example is when police are called upon to calm a domestic argument. While gaming regulators rarely serve this function, there are two primary exceptions. The first is when a transition occurs between personnel at a gaming establishment, such as its managers, operators or owners. Here, enforcement personnel can be present to witness the transition (i.e., the change of management) and to intervene between the parties if necessary. The second, and more common, example is the resolution of patron disputes. Here, enforcement personnel are brought in to garner facts regarding the dispute and conduct an investigation when necessary.

In addition to the above, gaming regulators can also adopt service related duties and prevention programs to reduce the occurrence of regulatory violations. As most regulatory violations result from lack of training and education or from inadequate procedures, the introduction of didactic programs can serve as a valuable resource in encouraging compliance. Typical examples of prevention services include: (1) prompting the gaming establishments to take an active role in preventing regulatory violations; (2) providing information to the gaming establishments that helps them prevent or detect regulatory violations; (3) setting standards that help gaming establishments detect regulatory violations; and (4) acting as a liaison to the casino industry.7

Prevention services, therefore, can range from something as simple as providing information to gaming establishments on criminals or cheats who are known to prey on such establishments or their patrons, to the setting of standards that gaming establishments must follow in terms of surveillance equipment specifications and game play. Setting such standards and requiring gaming establishments to follow them is important because departure from these standards often reveals regulatory or criminal violations.8 While standardization is useful in a number of facets of the gaming industry, its value is no more evident than in regard to table games.9

By way of an example, there are more than 20 varieties of blackjack being played in casinos worldwide. These varieties can involve whether the dealer uses one to six decks, whether the dealer must hit or stand on a 17,whether all cards are dealt face up or face down, and under what circumstances, if any, the patron may double down, surrender or split the hand.10 This lack of standardization allows cheats to effectively ply their trade, because telltale signs are less obvious. In contrast, only permitting a few types of games and having standard rules of play for each provides regulators with more control over the games. Specifically, not only do regulators decide what games can be made available but also how they are to be offered. This makes games easier to track and subsequently reduces the expenses associated with regulation.

Conformity, however, is also the enemy of innovation.11 The gaming industry is no different than other industries in that companies need to continue to push the envelope and stay current with trends in order to remain competitive. If set procedures prohibit ,or exceedingly stifle, a gaming establishment from adapting to changes in patron demand or reduce the variety of games available for play, patrons will seek play in other jurisdictions, and the benefits associated with standardization will be negated by the diminishing consumer base. Therefore, to effectively balance the pros of standardization versus those of innovation, each gaming jurisdiction must examine its own regulatory capacity. For instance, the standardization of play is most beneficial when a jurisdiction’s regulatory agency is understaffed or lacks the expertise to adequately monitor the play of games. In contrast, where a regulatory agency is sufficiently staffed and has familiarity with the games and the experience necessary to effectively regulate, it can relax standards and allow the gaming establishments to expand the number and variety of games offered without compromising regulatory controls.

A final component to an effective enforcement regime is that of disciplinary actions. In a perfect world, licensees would comply with all gaming laws without the need for regulators to discipline offenders. However, in reality, persons attempt to circumvent the laws and, in these instances, disciplinary actions provide a vehicle to conform licensee behavior to legal expectations. Regulators have many disciplinary tools available to them by which to ensure regulatory compliance, including advice, directives, fines, suspension, conditions to continued licensing, or revocation of the license. Isolated and unintentional violations that do not compromise the regulation of the gaming industry may be dealt with through working with the licensee to improve training or control, whereas patterns of unintentional violations that show a lack of commitment to the gaming regulations may need to be met with tougher sanctions to deter such behavior and ensure future compliance. Finally, egregious regulatory violations may invoke the harshest penalty, namely the revocation of a gaming license.

Similar to the other issues discussed throughout this series, gaming enforcement is a core component of any gaming regulatory infrastructure. While not as engaging as debating the type of gaming policy model to utilize or as tantalizing as the procurement of tax revenue, the issue of gaming enforcement is nonetheless one of the most critical that a jurisdiction considering the legalization of gaming will face. This requires a thorough assessment of resources, expertise and commitment in order to determine an appropriate regulatory system pursuant to these confines. Only when a jurisdiction comes to understand the value of efficiently enforcing its regulatory framework will that jurisdiction fully receive the benefits afforded by legalized gaming.